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Small Business Development Center
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Learn 5 C’s of credit analysis

July 20, 2014

Banks and other non-bank lenders are always willing to lend money on business loan deals that meet or exceed their lending requirements which are mostly built on the 5 C’s of credit analysis.

The 5 C’s include collateral pledged, capacity to repay, character and experience of the borrowers, conditions in the industry and economy, and lastly capital or the amount the borrower intends to inject in the business. Besides your personal funds and funds from friends and family, banks are your best source for start-up loans and we recommend approaching them first for the lending needs of a small business. It is also important to establish a banking relationship, even if you do not initially have a bank loan to start your business.

For those startup businesses that do not meet a bank’s lending requirements and only need relatively small amounts of money; another source of loans may make sense. These loans are called micro-loans and are made by non-bank lenders specifically for those small businesses that currently do not have access to traditional bank lending.

The Micro-loan program was developed by the SBA in the early 1990’s to increase the availability of small loans to start-up, newly established, or growing small businesses. They are made in relatively small amounts as the typical loan nationwide averages only about $13,000, but they can go up as high as $35,000-$50,000.

Funds from these loans can be used for most business purposes, including starting a business. A micro-lender is a nonprofit agency that receives funds from the SBA or other sources, for the purpose of making small loans to businesses that do not have access to traditional bank lending.

Since these loans are deemed riskier, the interest rate is usually higher than a typical bank loan. Nationwide the interest rates are between 8 percent and 12 percent, based on the borrower’s credit score, and amount of equity and collateral in the deal.

They may or may not require a business plan, but the micro lender may recommend the borrower seek technical business assistance from a provider such as the Small Business Development Center. The application process is fairly easy with only a three- or four-page application.

Micro-loans can be a good source of funds in small amounts for those businesses unable to qualify for traditional bank loans. They may cost more in terms of higher interest rates but they may be the only available source of funds for a business. Also, having a successful payment history on a micro-loan could make the business eligible for future bank loans. For more information on these loans see acciontexas.org, peoplefund.org, Tom Green County Revolving Loan Fund, or the Regional Consortium Revolving Loan Fund. Contact a certified business adviser at the ASU Small Business Development Center for information on all these micro-loan programs.

Over the years we have assisted numerous businesses with the micro-loan application process and provided the necessary technical business assistance to increase the chances of receiving a micro-loan.

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    Dave Erickson, ASU-SBDC Director and CBA IV

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